Dear fellow readers,
This is my No. 2 Value Pick for 2018.
Once again, these writings are just my humble highlights (not recommendation), feel free to have some intellectual discourse on this. You can reach me at :
or Email me at : tradeview101@gmail.com
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It has been a long time since we last had a public write up. The last article was published was in April 2018 before the historic chance in Malaysia political landscape. A regime change was unexpected for many and the economy of the country has taken a dip. Usually, this is very normal as change reflects instability. Whilst it is not purely 100% due to the change in government resulting in weaker economic growth for the country, there is definitely worries from international funds and local fund managers in current climate.
Global Markets vs Emerging Markets
The global markets have been in a doldrums especially with the trade war between China and US. Whilst it was supposed to be only a temporary issue, it seems it is not quite blown our of proportion. In fact, it seems that China is taking a brunt from this continuous economic policy changes of the US. The entire slump due to clamp down and cooling measure by the Chinese government for the property sector in China which has long overrun its forward earnings is now causing ripple effect through the industry. We foresee the trade war to persist and Chinese government cooling measure is only the beginning. We do not like the situation moving forward whilst we deem it healthy.
US Fed Rate Hike
The rate hike by US seems to be hitting emerging markets the worst. By right, most have foreseen US Fed to hike rate and will continue to go on a continuous uptrend path. Even talks for BNM to follow suit. However, emerging markets still was not able to withstand the impact with many currencies declining across the board. MYR is now weak again despite our PM stating how undervalued it is and its fair value being RM3.80 to the greenback. MYR will likely not strengthen in the next 6 months in our humble view due to our national debt and lack of economic stimulus in terms of monetary and fiscal policies.
Malaysia's 1 Trillion National Debt
We would like to think the new government came into place and save the country from further turmoil. Uncovering the debt and now working hard to reduce the debt levels is commendable. Of course as citizens, we look forward to a healthier balance sheet for the country. However, there is a saying that "Debt is the source for growth". Meaning if we want economic growth, a healthy level of debt is good. With borrowings which we can repay within reasonable time frame and interest cost, the government can utilise the funds to spur growth through fiscal measures such as catalytic government projects, infrastructure, growth corridors, new sector development and amongst others. Question is, how much can we borrow and at our rate? Will restructuring our current debts especially short term debts be the better way forward? I believe there will be savings from more prudent management under the new government where corruption, leakages can be mitigated however to what extent?Monetary policy would be more difficult under current climate due to US Fed rate hike. If we further consider monetary stimulus, the MYR will devalue further which makes it harder for us to both repay debts and will lead to higher import induced inflation.
Competitive Tax Incentive Policies, Economic Policies and New Industries
In order to help Malaysia move forward, there is a need to focus on the above three as the way forward apart from "cleaning the house" or "throwing the kitchen sink". We advocate 3 ways :
1. Competitive Tax Incentive Policies :
This is necessary to attract FDI and new money into the financial system of Malaysia. An example would be lower corporate income tax for companies in selected sectors which create jobs and bring about knowledge or skill transfer. Singapore and Hong Kong has lower corporate tax than most countries in Asia hence both countries has benefited from many MNC setting up corporations or satellite offices. Dubai has 0% corporate tax and flourished tremendously. Malaysia has been relying on 2 particular method when it comes to tax incentive, 1 is the Investment Tax Allowance model (ITA) another is the Corporate Income Tax Exemption both at 5+5 years. However, whilst effective in the past 20 years it has appeared less attractive in today's competitive world where countries are all competing for the limited top companies to invest in their country.
A best example would be Grab which is homegrown in Malaysia but the HQ is located in Singapore. This is a huge outflow for our country. How can one of the most valued new multi-billion valued business chosen our neighbor country instead of Malaysia as its base? For companies like this, the government should provide a unique set of tax incentive policies to cater to its growth trajectory. Imagine, Samsung in which was built and founded in Korea decided to move to Japan to set up its base due to more favourable policies.
2. Economic Policies :
We need very specific economic policies to tackle industry specific problems in order to make head way and help our Malaysian companies be more competitive. Example : we need to have a clear policy to attract FDI apart from saying we welcome but no concrete actions. FDI requires support not only from tax incentives policy but also provision of space for business, IP and copyright privileges, healthy workforce supply amongst others.
Malaysia is a blessed country with oil and gas, agriculture, manufacturing and service sector. If we intend to elevate to become service oriented nation, our banking industry needs to be reformed specifically (private banking or wealth management). In the past there was a wave of privatisation exercise by the government of private companies making efficient private companies into GLCs which ballooned in debt and incompetency due to poor management or governance.
We can consider divesting companies which are oversize and cumbersome into smaller efficient listed entities whilst unlocking its value. Consolidation was one of the ways in the past to make corporate Malaysia dynamic but the involvement of political appointees instead of sound corporate professional has shown its ugly side today. Divestment may be one route we can consider to unlock values. Another is to ensure healthy competition amongst SME which are growing into large companies. These segment is the foundation of Malaysia's economy. If SME do well, the country will as the trickle down and ripple effect is greater than a single conglomerate which ultimately benefits the majority shareholder or institutional funds or family offices.
3. New Industries :
We have been talking about new industries for a long time however which industry has Malaysia truly put itself on the map? We are known for oil & gas, furniture, gloves, durian, amongst others. Creative industry requires lots of help from government especially when at its infancy. We are severely lacking behind in terms of technology and innovation no matter how much we champion having Cyberjaya and MSC in the early days of 1997s. IT in itself has already taken a new turn but we are not doing enough. Even adoption of e-payment gateways we are still slower compared to other Southeast Asia countries. I think from this aspect we have a lot to improve and a sound ecosystem is the best way to help creative industries not only in terms of maybe more lenient loan applications, VC funding backed by Government (each dollar private sector puts in, government related institutions puts a certain % to match). Private sector should drive the business and government to facilitate and support.
All in all, the time is now. Malaysia hit a reset button. I think it is time we all reset.
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Food for thought: